Verônica De Fátima Santana
Doctorate – Essays on IFRS and Investment
Advisor: Prof. Dr. Francisco Henrique F. de Castro Jr
Comission: Profs. Drs. André Luis Squarize Chagas, Ricardo Lopes Cardoso and José Elias Feres de Almeida
Class: 217, FEA-5
This research investigates the role of IFRS on investment, both at the macro level, studying cross-border foreign investment, and at the micro level, studying firm-level investment. The IFRS proponents argue that more uniform information across borders is necessary to make investments in different countries comparable to decrease information restrictions, facilitating cross-border capital flows. Furthermore, the IFRS proponents also claim on its superior quality, arguing the international standards should provide information not only comparable, but also of high quality. Since well-founded investment decisions are only possible if the agents have access to high-quality information about the economic events of interest, IFRS adoption is expected to increase investment efficiency by providing such information. Divided into three different essays, this dissertation evaluates these propositions analyzing the role of IFRS in the interdependent dynamics of cross-country capital flows, in the sensitivity of foreign investment to global financial shocks in Latin America, and in the efficiency of firm-level capital allocation. The first essay studies the spillover effects of international capital flows among countries and how the adoption of IFRS affects these spillovers. Through a generalized two-stage instrumental variables estimator for spatial autoregressive models with an endogenous weight matrix, the results show a competition effect among countries for foreign investment. While IFRS seems to increase this competition via a negative indirect effect, the direct effects are positive, reducing the spatial negative autocorrelation effects. This result suggests that countries who adopt IFRS first benefit more from foreign investment, but countries adopting later can still benefit decreasing the gap between them e the earlier adopters. The second essay focuses on the effect for moderating the impact of international market uncertainty on the volatility of capital flows to Latin America. Analyzing Argentina, Brazil, Chile, Colombia, Mexico and Peru via a panel FGLS model, the results show that while IFRS is related to large and more volatile foreign investment inflows, there is some evidence that the adoption minimizes the effects of international uncertainty shocks. Finally, the third essay studies the role of IFRS to ease firms financing constraints along with financial development, via the estimation of an investment structural model. The results show IFRS adoption is capable to improve firms' financing possibilities decreasing their need to rely on internal funds to invest in their activity. Firms in countries with both low economic and financial development but adopting IFRS have similar financing constraints levels as firms in low economic but high financial development (of with low financial but high economic development) countries who do not adopt IFRS. Taken together, the results are consistent with the hypothesis that higher quality accounting information can improve investment decisions. Increased countries' competitivity towards capital flows, decreased sensitivity to uncertainty shocks in Latin America, and minimized firms' financing constraints indicate IFRS adoption is able to improve investment allocation decisions. These results are important mainly from a policy perspective, showing IFRS can have positive effects to investment allocation efficiency, which is expected to improve economic performance and, consequently, growth.
*Abstract provided by the author